Investors Skeptical Over More M&A for Kirin

Investors understand the need for Japanese companies to pay up for growth overseas. But Kirin Holdings shareholders, remembering the bitter taste of an earlier acquisition, don’t like the sound of an imminent deal in Singapore.

Kirin said Friday that it has decided to tender its 15% stake in Singapore’s Fraser & Neave Ltd. after a company owned by Indonesia’s Riady family lobbed a higher bid for F&N at S$9.08 each, compared to an earlier S$8.88 bid from Thai billion Charoen Sirivadhanabhakdi. It would then buy Fraser & Neave’s food and beverage business for about S$2.7 billion.

The news drove Kirin’s shares more than 4% lower at the open in Tokyo on Friday morning against a higher Nikkei Stock Average, as investors digested the implications of yet another acquisition by the deal-thirsty drinks maker.

The acquisition of Brazillian brewer Schincariol in August last year, was a particular concern. Kirin completed the Schincariol deal in November 2011 for $3.9 billion, buying the rest of the company it didn’t already own. Analysts thought the price was high, at about 16 times EV/Ebitda compared to around 11 to 12 times for brewery deals on average, Credit Suisse calculated.

Kirin Managing Director Hirotake Kobayashi assuaged shareholders at the time of the Schincariol deal, and said that the company would not issue more stock to pay for the deal, adding debt-financed deals were also unlikely, amid concerns over the company’s debt-to-equity ratio. Mr. Kobayashi also said that the company’s huge investment outlay “has run its course,” but did not rule out investments that could create synergies.

The jury is still out on the success of the Schincariol deal, although Kirin said it is confident that its aggressive M&A activities are finally starting to crystallize in its top-line figures. It expects the overseas business to generate an operating profit of Y27.5 billion this year, up 80% from the year before. It’s also signaling greater intent on supporting its overseas businesses, announcing in October that it would create an advisory board to its president that would include directors from Australia’s Lion, which it bought in 2009, and Schincariol.

This time, Kirin is planning to cash out of its stake in F&N, which it bought in 2010 for $970 million, potentially netting the company about S$1.9 billion ($1.6 billion). It would then make an offer for the food and beverage business of F&N, whose brands include isotonic drink 100 Plus, Seasons and Fruit Tree in Malaysia.

Kenichi Hirano, an analyst at Tachibana Securities, said with overseas growth being the only option for Kirin, using cash and not stock is the right option, with easy monetary policy from the Japanese central bank only making it “easier to push these kinds of deals through.”

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